by Bill Singer
SEC Charges New York Firms and Chief Compliance Officer for Inadequate Procedures to Protect Nonpublic Information
November 17, 2010
The Securities and Exchange Commission ("SEC") deemed it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against The Buckingham Research Group, Inc. ("BRG"), pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Buckingham Capital Management, Inc. ("BCM"), and pursuant to Sections 15(b) and 21C of the Exchange Act and Sections 203(f) and 203(k) of the Advisers Act against Lloyd R. Karp ("Karp") (collectively, "Respondents").
In anticipation of the institution of proceedings, Respondents submitted Offers of Settlement (the "Offers")(without admitting or denying the findings) which the SEC accepted. Respondents consented to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order").In the Matter of THE BUCKINGHAM RESEARCH GROUP, INC., BUCKINGHAM CAPITAL MANAGEMENT, INC., and LLOYD R. KARP, Respondents (Order Instituting Administrative And Cease-Anddesist Proceedings Pursuant To Sections 15(B) And 21c Of The Securities Exchange Act Of 1934 And Sections 203(E), 203(F) And 203(K) Of The Investment Advisers Act Of 1940, Making Findings And Imposing Remedial Sanctions And A Cease-And-Desist Order, Investment Advisers Act Of 1940 Release No. 3109 / Administrative Proceeding File No. 3-14125, November 17, 2010)
Respondents
BRG is a Delaware corporation with its principal place of business in New York City. Since 1982, it has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. BRG's primary business is providing equity research to hedge funds, broker-dealers, and other institutional customers, and the firm is known for its research in retail, apparel and footwear. BRG obtains the majority of its revenue from executing trades for its research customers.
BCM is a Delaware corporation with its principal place of business in New York City. Since December 1985, it has been registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act. BCM is a wholly-owned subsidiary of BRG. BCM provides discretionary investment advisory services to investors that include high net worth individuals and various entities. BCM offers its clients equity portfolio management through two groups of funds, one that invests in the retail, apparel and footwear sector and one that invests in a diversified portfolio.
Lloyd Karp, age 52, was the chief compliance officer of both BRG and BCM from December 2002 to May 2010. He has also been the chief operations officer of BRG since 2004, and is the corporate secretary, treasurer and a senior vice-president of the firm. Karp has a small direct ownership interest in BRG. Karp has Series 7, Series 8 and Series 63 licenses, and has been an associated person and registered principal of BRG since December 2002.
SEC's Findings
From at least September 2005, BRG and its subsidiary, BCM failed to establish, maintain and enforce policies and procedures reasonably designed, taking into account the nature of their respective and interconnected businesses, to prevent the misuse of material, nonpublic information. For 2005, BCM also failed to conduct an annual review of the adequacy of its compliance policies and procedures and the effectiveness of their implementation, as required by the Advisers Act.
BRG and BCM's policies and procedures were deficient in a number of ways. BRG had a written procedure to address the misuse of material, nonpublic information, but did not follow its written procedure in practice. Important compliance policies and procedures were not contained in BCM's written policies and procedures. Further, in some instances, BCM's written policies and procedures were so unclear that employees did not understand their responsibilities. In other instances, the practices BCM employed varied materially from its written policies and procedures. These failures led to inadequate implementation and enforcement of the firms' written compliance policies and procedures.
BCM also failed to create and maintain records evidencing important supervisory authorizations and compliance reviews. In October 2006, the SEC examination staff began conducting an examination of BCM. In the course of preparing for the examination and collecting records to produce to the SEC staff, BCM discovered that certain compliance-related records were incomplete and that others were missing from its files. BCM personnel altered its records by creating compliance documents, and produced those records to the SEC examination staff without disclosing that those records included "replacements" for incomplete or missing records. This conduct prevented the examination staff from discovering BCM's failure to follow its compliance procedures and violated BCM's statutory obligation to make its records available for examination.
Karp was the chief compliance officer of both BRG and BCM during the relevant period and was directly responsible for establishing and administering the firms' compliance programs, including policies and procedures reasonably designed to prevent misuse of material, nonpublic information. Karp failed to discharge those responsibilities adequately, which resulted in the violations by BRG and BCM.
Settlement
In determining to accept the Offers of Settlement, the SEC considered the respondents' remedial acts and undertakings, which included a commitment to Retain, at Respondents' expense and within 30 (thirty) days of the issuance of the SEC's Order, a qualified independent consultant (the "Consultant") not unacceptable to the staff of the Division of Enforcement (the "Staff") to conduct a comprehensive review of Respondents' policies, practices, and procedures to ensure compliance with the federal securities laws. In addition to fully cooperating with the Consultant, the respondents have agreed to require that individual to report to the SEC's Staff on the consultancy.
Sanctions
Pursuant to Sections 15(b) and 21C of the Exchange Act and Sections 203(e), 203(f) and 203(k) of the Advisers Act, the SEC ordered that:
Cease and Desist
- Respondent BRG cease and desist from committing or causing any violations and any future violations of Sections 15(f) of the Exchange Act.
- Respondent BCM cease and desist from committing or causing any violations and any future violations of Sections 204(a), 204A and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.
- Respondent Karp cease and desist from causing any violations and any future violations of Section 15(f) of the Exchange Act and Sections 204A and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.
Censure
- Respondents BRG, BCM, and Karp are censured.
Money Penalty (Payable within 10 days of the entry of the order to the US Treasury)
- Respondent BRG: $50,000 .
- Respondent BCM: $75,000
- Respondent Karp: $35,000.